The end of the year is always an interesting time. A lot of companies budget for the next year this quarter, many close transactions before December 31st to benefit from stimulus-related depreciation or tax credits, and most are ultimately looking to manage the balance sheet for the year-end. We had one such request a few years ago where the client really wanted the equipment to deliver and close in the current year but did not have the budget for the expenditure until the next year. We worked with the hospital to provide a solution that fit in the current year’s budget, but the first payment was not due until the following year by using a custom-crafted structure.
A little background: The company had 25 years in business, was a for-profit privately held S-Corp hospital with over 200 beds, was very profitable and very well managed. However, it also set very tight rules about capital expenditures and living within its means. There was no more room in the budget for this essential schedule of equipment.
The Problem: With the year coming to a close, the client needed over $2 million in medical equipment and was getting some very deep discounts from the manufacturers to buy that equipment in the current year. However, the customer had already spent all of its capital budget dollars for that year. As it was very profitable, every write off and tax expense it could use in the current year meant a 35% reduction in income taxes. In addition, the vendor discounts for buying by year end and closing this opportunity immediately were impossible to ignore.
The Solution: We agreed to fund the vendors in the current year but not to start the lease for the equipment (to “commence”) the lease until the next year. This ended up saving the company hundreds of thousands of dollars on the year end purchase discounts. Our solution also saved the hospital thousands in taxes by acquiring the assets in the current year, allowing our client to take the depreciation and tax credits in the current year. At the end of the day, our unique structure matched the budget requirements of the very strictly managed healthcare facility.
The Result: Everyone was very happy with the transaction and we strengthened a long term relationship with the client, which continues today.
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